View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

A meeting of the Federal

Committee was held in


of the Board of Governors of the Federal Reserve System in

Washington on Monday,

November 29,


at 2:30 p.m.

Eccles, Chairman
Harrison, Vice Chairman


Morrill, Secretary
Wyatt, General Counsel
Goldenweiser, Economist
Williams, Associate Economist
Dreibelbis, Assistant General Counsel
burgess, Manager of the System Open
Market Account

Mr. Carpenter, Assistant Secretary of the
Board of Governors of the Federal
Reserve System
Mr. Thurston, Special Assistant to the
Chairman of the Board of Governors of
the Federal Reserve System
Chairman Eccles suggested that the Committee hear first the re
ports of Messrs.

Goldenweiser and

illiams on the business and credit

Mr. Williams reviewed the circumstances which attended the de
velopment of the present business recession and stated that the decline

business activity, which was expected in

the summer following the

abnormal activity in the spring, did not appear until August because of
the fact that production was maintained chiefly on orders for inventory
accumulation and forward buying, which had been relatively larger than



was realized at the time.
more severe than if


the major decline in

The delay in the recession, he said, made it

had come somewhat sooner and it was aggravated by
security prices which was quite unexpected and

which caused everyone to wonder whether the country was facing another
He then compared the present basic economic situation with con
ditions existing in 1929 and expressed the opinion that such a compari
son was highly favorable to the present for the following reasons:


The relatively small amount of construction during the last eight years
had resulted in a large accumulated demand for housing;


while the

future needs of the utilities were uncertain because of the political
situation, the demand for utility equipment would be larger and perhaps
more pressing than for housing if
could be removed;

the uncertainties in the industry

(3) much railroad equipment was obsolete and,


for the unsatisfactory economic position of the industry, there would be
a substantial demand for equipment,


connection with which Mr. Williams

expressed the opinion that, unless there was an increase in traffic or
some specific action was taken to improve the position of the railroads,
which were suffering from rising wages, tax costs, and fixed rates, it
was difficult to see how the industry could make any major contribution
to recovery;

(4) there had been a period of approximately eight years

during which, with the possible exception of the last one or two,


had been installed less than a normal amount of new general plant equip

which, together with the rise of wages which had occurred in recent
should create a considerable impetus toward demands for improved



plant equipment when the outlook is

clearer than at the present time;

there had been much less speculation during the current period than

in 1929 either in

securities or real estate;


the position of banking

was better, with much less possibility of hoarding because of deposit
insurance and with many of tne weaker banks out of the picture.

In the

light of these conditions, he regarded the conclusion as warranted that
the present trend could not go beyond a minor depression.
He referred,


to some elements in the present situation

which were different from the conditions existing in 1929 and which ren
dered difficult any forecast at the present time.

He stated that there

never had been a period of recovery during which there had existed, as
in the present situation,

continued monetary ease throughout the period,

and that, for that reason,

a policy of monetary ease could not be counted

on as a major corrective.

Another important thing, he said, was the

Governnent fiscal policy,

in that this was a year of transition from pub

lic spending to a balanced budget which it

was anticipated would effect

a reduction in the national income of from $2,500,000,000 to
$3,000,000,000 and which presented the question whether the transition
from a program of public spending could safely be effected with such
rapidity and whether the transition should not have been begun earlier.
The third question, he said, was the relation between the administration
and the business community arising out of the reform and recovery program
of the former, and he expressed the opinion that it

would be possible to

make some adjustments without abandoning the major reform objectives con
templated by the program.

He felt that, if

something more than a minor



depression should develop, the reasons therefor would lie in the field
of these three questions.
Mr. Williams then stated that the conclusion was quite clear
that those in

authority should not sit

back and do nothing,

program of Government spending should not be revived,

that the

but that steps

should be taken to devise a means of encouraging private investment.
He said that it

was unwise to do nothing on the supposition that the

situation would work itself


and that the prudent thing to do would

be to take affirmative action to help the situation along.

connection with the question of the revival of Government

spending, he expressed the opinion that the limits on the time and mag
nitude of a Government

spending program had about been reached and that

would be better to continue the policy of balancing the budget than

to abandon that policy.

Resumption of public spending, he said, would

tend to create an unstable banking and business situation and further

He preferred to see the transition from public spending

to a revival of private investment effected with as little complication
by outside influence as possible,



causes of the recession were non-monetary,

since the primary

he would put the emphasis

on the program of private investment and first

and foremost on a pol

icy of reviving the construction industry where the most obvious gap


this connection,

he felt

encouraged by the fact that

since a diagnosis of the existing circumstances indicated that the sit
uation did not need to get out of hand or result in
a minor depression,

anything more than

there was a favorable atmosphere in

which to work



out a program of private investment.
Whether a minor monetary program
major program,

should be fitted into the

in his opinion, was a secondary question.

With refer

ence to the question of taxes in the program, he felt that there should
be a careful exploration of the undistributed profits tax, capital gains
tax, and surtax, to determine whether some adjustment should be made
in these fields.
Mr. Goldenweiser stated that, while no reference could be made
to concrete changes, it was believed that the situation had improved
somewhat over two weeks ago with some improvement in


that there was no previous record of a simultaneous decline in

He said

prices and industrial production that had been as sharp and large as
the present one, that this movement was accompanied by a psychological
reaction which was widespread,

and that it

had resulted in a feeling of

resentment and almost of despair as well as uncertainty as to the pros
pects of recovery.

While this feeling was still

present, he said,

there had been a sufficient change in the atmosphere so that the situa
tion could be considered a little

more clearly at the present time then

was the case a few weeks ago.
He then stated that the rapid rise in business activity in the
spring resulted from everyone wanting to get materials before prices
advanced further and plant capacity was exceeded and that after these
orders had been filled new orders were not adequate and the recession,
which was greater and much sharper than anyone had anticipated, was the


In connection with the System's position in that situation, Mr.

Goldenweiser referred to the policy of monetary ease which had been
followed since the early months of 1932, which had been effectuated
through open market operations, devaluation of gold, large gold imports,
reduction in rates on time deposits,
as well as Government spending.
Governors in July, 1936,

and generally liberal policies,

He stated that, when the Board of

increased reserve requirements of member banks,

the action was taken as a means of preventing future unfavorable devel
opments and not as a reversal of the existing policy.
that it

He also said

was, however, the first move that was not in the direction of

further ease and was followed in

December by sterilization of gold by

the Treasury and in January, effective in March and May,
creases in

reserve requirements.

by further in

He added that, while these actions had

been referred to as causes of the recession, in his opinion, the reces
sion was the result of non-monetary causes which were more fundamental.
He concurred in a position which had been taken by Mr.
would have been better if

Williams that it

the last increases in reserve requirements

could have been made effective sooner, before long time interest rates
had declined quite so low and before boom psychology had developed.
He then expressed the definite opinion that the action in rais
ing reserve requirements was a correct action although somewhat late and
that, if the policy adopted by the Federal Open Market Committee last
spring of increasing the System portfolio had been put into effect
earlier and more vigorously, regardless of whether it
sulted in

would have re

any different situation from what exists today, the System



would have been in a stronger position the next time action was taken.
The question before the System, Mr. Goldenweiser said, was
whether it

should take any action at this time.

He felt it

was impor

tant that the System maintain a flexible attitude and be prepared to
avoid the mistake of taking desirable action too late.

He was also of

the opinion that the recent purchases of securities by the System were
helpful as indicating a lack of rigidity and that, if,

after the Treasury

financing was past, there were the slightest indication that open market
action would be desirable, such action should be taken, not with the
thought that it

would cure the situation, but rather with the knowledge

that there was practically no danger in

a policy of further ease at the

present time.
He stated that he was of the opinion that the present situation
did not call for desterilization of gold by the Treasury on monetary
grounds as there was an abundance of reserves which was likely to con

and that if

a shortage of reserves should develop it

would be

better for the System to act through the open market rather than for the
Treasury to desterilize gold.

He felt, however, that if

business situation continued and the Treasury believed it
greatly to increase its

the present
was desirable

expenditures without increasing the public debt,

the System reasonably could not interpose any objection to the desteril
ization of gold.
Mr. Goldenweiser then presented a chart showing the estimated
cash income and expenditures of the Treasury for recent years and pointed
out that, according to budget estimates, Treasury operations for the



fiscal year 1938 on a cash basis would actually take in more money than
would be paid out,

whereas during the previous fiscal year approximately

$2,000,000,000 was paid out in
pressed the opinion that, if

excess of the amount taken in.

He ex

actually carried out, this would be an un

precedented drop in Treasury expenditures and possibly more than the
country's economy could sustain.
feel it

He added that, if

necessary to desterilize gold in

the Treasury should

order to meet expenditures,


System later might be faced with a difficult situation for the reason
that if it should be necessary to absorb a substantial amount of excess
reserves through allowing maturities in

the System portfolio to run off,

there would result a situation where the System would be left with a
small portfolio of securities with relatively long maturities which would
be inadequate to meet future problems of credit control.

In this con

nection, he said, any large addition to required reserves to enable the
System to manage the situation would only accentuate the problem of how
to maintain membership in

the System.

He also referred to the fact that the seasonal increase in the
demand for currency and credit this year had been very much less than
usual and had resulted in

the banks having larger excess reserves than

there had been any reason to expect.

This situation, he felt, was not

entirely due to the smaller demands for currency and credit resulting
from reduced business activity and lower prices but also to the use at
this time to meet seasonal requirements of funds paid out as bonus pay
ments last year.

He did not anticipate that the further increase in

currency between now and the end of the year would carry the amount of



currency outstanding to a figure above that at the peak of demand last
He said he saw no occasion for any major monetary action at


but he felt

that minor monetary adjustments might be made

pursuance of a liberal policy in

the present situation.

response to an inquiry with respect to the relation of

prices of farm products and buying power to the recovery movement,

Goldenweiser said that the farmers'

factor in

sustaining economic activity;

buying power was an important
that the prospects for prices

of farm crops next year were not encouraging;
was all

and that, therefore,


the more necessary that something be done to encourage private

financing in

industry and to sustain the industrial demand for agri

cultural products as much as possible.
There followed a general discussion of existing conditions,
during which Chairman Eccles suggested that,
problem before the Committee,



order to clarify the

statement be drafted which would re

view the present situation and the steps that might be taken with a
view to counteracting the present downward trend of business activity.
The other members of the Committee concurred in
was understood that Messrs.


prepare a draft of statement along the lines

the suggestion and it

Williams and Thurston would
proposed by Chairman

Eccles for consideration at another session of the meeting to be held
on Tuesday.



Thereupon the meeting recessed with the understanding it would
reconvene on Tuesday, November 30,

at 10:30 a.m.